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Prepare the journal entry to record mills investment

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Reference no: EM132686328

Mills Corporation acquired as a long-term investment $280 million of 6% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $330 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $320 million.

Required:

Question 1: Prepare the journal entry to record Mills' investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.

Question 2: At what amount will Mills report its investment in the December 31, 2018, balance sheet?

Question 3: Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $340 million. Prepare the journal entries to record the sale.

  1. Record any reclassification adjustment.
  2. Record the sale of the investment by Mills.

Reference no: EM132686328

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